China’s HNA facing deep liquidity crunch

HNA’s liquidity crunch is having a rippling effect across its business in the conglomerate.

Two oil industry sources have disclosed, China’s HNA Group has accumulated an estimated $476 million (3 billion yuan) bill with a state-run aviation fuel company.

The development underscores a deepening cash crunch faced by the core businesses in the conglomerate.

According to sources, HNA’s outstanding balance with China National Aviation Fuel Group Ltd (CNAF), China’s almost sole marketer and distributor of aviation fuel, has swelled significantly over the last 6 months.

The sourcesdid not quantify the outstanding amount.

“HNA has not stopped fully paying its bills, but it only has paid a small amount at a time, so the outstanding (balance) has grown bigger and bigger,” said a senior oil industry executive with direct knowledge of the matter.

As per another executive who is briefed on the situation, the problem “really deteriorated over the past several months”.

Both executive preferred the cover of anonymity citing sensitivities.

Incidentally, HNA has controlling stakes in Hainan Airlines Holding Co and 12 other carriers in Hong Kong and China.

The Chinese conglomerate is also heavily invested in aviation, logistics, lending, and financial services and also has stakes in Old Mutual’s asset management unit and in Deutsche Bank AG.

On Wednesday, the HNA Group said in a statement, Hainan Airlines “maintained positive and friendly communication” with CNAF. “At present, all businesses are carried out steadily”.

The unpaid bills underscore how the liquidity crunch is having a rippling cascading effect throughout the conglomerate’s businesses, including its highly successful airlines business.

Earlier in February, S&P Global Ratings downgraded the credit profile of the HNA Group including its airline caterer Gate group, citing a “deteriorating liquidity profile”.

The liquidity crunch has also impacted the operations of Dublin-based Avolon Holdings, an aircraft leasing firm, which HNA’s subsidiary Bohai Capital Holding acquired two years ago for around $2.5 billion, which took the unprecedented step of amending its guarantee structure, and formally segregated its financial resources from that of HNA and its units.

China’s CNAF, which supplies fuel to around 215 airports in China and 46 airports globally, became acutely aware of HNA’s liquidity crunch in late September when the issue “started to erupt”, said a source.

Sources estimate, HNA has accumulated unpaid bills to CNAF to around 3 billion yuan, representing around 4 months worth of total billing to the group.

CNAF has responded to the issue by setting up a task force for repayment options, said two sources. “CNAF has initiated many exchanges with HNA, verbally and in writing, but that has been barely fruitful,” said sources.

Its solutions include swapping the debt for a stake in Meilan Haikou Airport, which is controlled by HNA, said a source.

Despite the liquidity crunch, CNAF continues to supply fuel to HNA airlines due to concerns on the impact the suspension of sales will have on the airlines. “(Ironically) it’s now CNAF’s social responsibility to keep its flights running, because if fuel is suspended, passengers will be hurt and then it becomes a social problem,” said a source.

A spokesperson for CNAF acknowledged the “sizeable” outstanding due amassed by HNA since the second half of last year, but declined to elaborate on the matter. “Communications with HNA are under way,” said CNAF’s spokesperson. “It’s hard to predict results, but we’re hoping for a solution.”